Minyan Mailbag - Yen Intervention

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Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Prof. Succo,

A quick note to ask something and to possibly point something out: even though it may seem inconceivable, a rally in rates that pricks your mentioned "bubble" can be accompanied by a rallying dollar as well. For example, if for any reason the dollar started rallying on its own, there would be no need for intervention in the FX market, hence no need to load up on treasuries by the Asians, hence, no marginal buyer to keep rates down. The question is: is there any catalyst that can cause the dollar, in the short term, to rally on its own. Admittedly, there's isn't an obvious one. The only thing I would point out is that most people are expecting the yuan to be revalued upward, and to the extent that that doesn't happen immediately, there *could* (not *will*) be a dollar squeeze. I would love to hear your thoughts on this admittedly seemingly far-fetched scenario.

Regards, Minyan AA

Minyan AA,

I don't have anything constructive to say other than "stranger things have happened".

John,

Ha Ha! Well said!

I was merely pointing out that interest rates can rise both with the dollar falling out of bed AND with it rallying. Yes, the dollar rallying requires lots of strange things to happen, possibly. One thing, though, that is on the dollar's side is that the possibility of a yuan revaluation is *extremely* remote in the short term (the PBOC will be bankrupted if the yuan is revalued upwards - I can't see how China would allow that to happen currently). To the extent that dollar bears are waiting for that as the catalyst to take profits, I feel they are going to be disappointed.

Thanks for your response.

Minyan AA

Minyan AA,

The real dollar bear is the U.S. government: their only response to deflation pressure/debt accumulation is print dollars.

A study of Weimer Germany shows that it wasn't really stupidity that led to its hyper-inflation, rather it was by designed by the government as the only recourse to the immense pressure to pay back debt.

To the innocent, monetary policy is benign; to the naïve, it can be the result of stupidity; to the sophisticated, everything has a reason and a purpose. Those in power love money and want to keep it. The real losers of inflation are the middle and lower classes. The losers of deflation are the upper classes. Who do you think will win this one?

Best,John

John,

I see your point - and can't find any argument against it.

The only issue is one of timing (isn't that really the ONLY issue, period!?). It may be a few months/years away than commonly perceived.But yes, I doubt that there's any doubt to the long term direction of the dollar.

One last point - in a hyperinflation, stocks do fantastically in nominal terms - Weimar shows that too. Could that be why the stock market continues to show such superb resilience?

Again, thanks for your time. I have been studying the various histories (Weimar, Austrian economics etc.) the past 2 years, and it helps to be able to talk to someone knowledgeable.

Regards, Minyan AA

AA,

Or it could be around the corner. That is why I stress to watch the dollar/yen.

But you are only looking at the first phase of Weimer. The inflation/hyper-inflation first phase drives up stock prices because no ones sees the ramifications. At some "cross-over" point, the velocity of money comes to a grinding halt as the domestic economy no longer values money and begins to barter. That is when stocks collapse.

In our case, it will be a mild frm of that. The "world" will realize that we just plan to monetize and on the margin will buy fewer of our financial assets (they are not only long bonds/stocks, but dollars too). This will force U.S. rates up rather stingingly. What do you think will happen to stocks then?

The fallacy that people are holding to is that there are no losers in this game. The Japanese will soon realize that they are the big losers and react negatively.

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